Of all risks in businesses, listed below are the main risks that Sumitomo Chemical Group (the Group) recognizes may significantly impact our investors making important decisions. Please be reminded that these main risks may not be limited to only those mentioned below, and any conditions with reference to the future are based on information available to the Group as of the end of this consolidated fiscal year.
The Group works to minimize such risks, while also building and enhancing our risk control system that allows us to use these risks as opportunities.
This consolidated fiscal year: April 1,2020 - March 31,2021
1. Risks involving management strategy
1) Market-related risks
As a chemical manufacturer offering a diverse range of products, the Group engages in a wide range of businesses which are subject to a number of risks. Risks associated with market volatility and feedstock supply shortages concerning the Group’s businesses are mainly as follows.
The Group's businesses are exposed to price competition. It is expected that the product lines of the Group will be exposed to severe price competition for various reasons, such as the participation of foreign enterprises in the domestic market, the inflow of imported products as a result of tariff reductions, and the increasing market entry of generic products. Although the Group is seeking to reduce costs, failure to address price competition may have an adverse effect on operational results and the financial condition of the Group.
Impairment losses may be recorded in tangible fixed assets owned by the Group due to lower productivity and declining market prices as a result of a deterioration of the business environment. This may affect the business performance and financial status of the Group.
Deferred fixed assets may be reduced if some or all of them are deemed unrecoverable because of a change in our forecasts or assumptions of future taxable income, triggered by a significant deterioration of the business environment, or because of a rate change after a tax law revision. This may affect the business performance and financial status of the Group.
Overseas sales of the Group account for more than 60% of total sales, and sales in the Petrochemicals and Plastics Segment and other Segments are particularly large in the Asian market, accounting for a significant share.
Furthermore, a large proportion of sales in the IT-related Chemicals Segment depends on specific customers in China, Korea and Taiwan. Given this situation, in the event that the Group is required to cut prices due to deteriorating economic conditions in the Asian market or changes in the business standing of client enterprises, such circumstances may have an adverse effect on the operational results and financial condition of the Group.
(Petrochemicals & Plastics)
Naphtha, a main feedstock for the Petrochemical and Plastics Segment, is sometimes subject to radical price fluctuations arising from various causes, including public security problems in the Middle East or global economic conditions. If the price of naphtha radically increases, it may have an adverse effect on the operational results and financial condition of the Group due to a delay in the reflection of such cost increases in product selling prices.
The supply of naphtha and some other raw materials is dependent on particular geographical areas or suppliers. Although the Group is seeking to reduce the risk associated with its inability to procure major raw materials by developing multiple supply sources, there is no guarantee that supply shortages of such major raw materials will not occur. In the event that the Group cannot procure necessary major raw materials on its own, such circumstances may have an adverse effect on the operational results and financial condition of the Group.
(Energy & Functional Materials)
The Energy & Functional Materials Sector supplies lithium-ion secondary battery materials, mainly for use in electric vehicles (EV). If the market weakens as a result of changes in the EV-favorable policies of any country, or if next-generation batteries become mainstream after technological innovations and our Group fails to address this trend, it may affect the business performance and financial status of the Group.
Since the speed of technical innovation for products in the IT-related Chemicals Segment is extremely rapid, it is essential that the Group develop and supply new products to its customers in a timely manner. In the event that the Group is unable to effectively develop new products that satisfy customer needs, or if an important technical innovation is made by another company in advance, the business results and the financial condition of the Group may be adversely affected.
(Health & Crop Sciences)
The shipments of agrochemicals and household insecticides in the Health & Crop Sciences Segment are affected by the growth status of target crops and by outbreaks of crop diseases or pest infestations, caused by abnormal climate conditions in various parts of the world. Depending on such factors, drastic price fluctuations for feed additives may also occur. If crop growth is not as good as expected, if pest infestations are reduced, or if drastic price fluctuations occur, such circumstances may have an adverse effect on the operational results and financial condition of the Group.
In the Pharmaceuticals Segment, the difficulty of new drug discovery and development is increasing, and there are no guarantees that development will proceed according to plans and reach approval and sales. Moreover, concerns about safety or effectiveness could delay development, or lead to a situation where development must be cancelled. If these sorts of circumstances occur, the Group’s operating results and financial position may be significantly affected.
In Japan, the precipitous decline in Japan’s birthrate and the rapid rise in the country’s elderly population are the prime factors causing the financial state of Japan’s healthcare insurance system to deteriorate. In this climate, measures continue to emerge aimed at curbing healthcare costs by price restraint of branded prescription drugs and promotion of generic drug use, and debates on the country’s healthcare reform continue. Moreover, there is a possibility that regulatory changes may be passed and implemented with the goal of controlling drug costs in the US as well, while in China, there is a possibility that changes to the healthcare system may be implemented with the aim of controlling prescription drug expenses. These sorts of regulatory changes, depending on their direction, may have a significant effect on the Group’s operating results and financial position.
(Exchange rate fluctuations)
Sumitomo Chemical (the Company) and its domestic consolidated subsidiaries import raw materials from overseas and export finished products manufactured in Japan, and the export value of finished products exceeds the import value of raw materials. If the Japanese yen appreciates against foreign currencies, the products will be less competitive in price compared with products made in foreign countries. Moreover, the reduction in the proceeds received from exports could exceed the reduction in payments for imports. Moreover, in recent years, as the Group has expanded its business activities outside Japan, in areas such as South America and India, the impact of changes in the exchange rates between the various local currencies in those regions and the US dollar and other currencies has correspondingly grown as well. In order to cope with these circumstances, the Group is seeking to minimize short term exchange rate risks through currency hedges such as forward-exchange contracts or by conducting export transactions in Japanese yen. However, since it is impossible to completely hedge risks due to mid- or long-term fluctuations in currency exchange rates, there is a possibility that the appreciation of the Japanese yen would exert an adverse effect on the operational results and financial condition of the Group.
Furthermore, the operational results of affiliated group companies in foreign countries are converted into Japanese yen for the purpose of preparing the consolidated financial statement. Depending on the exchange rate at the time of conversion, the values after the conversion into Japanese yen may potentially be impacted and may negatively affect the operational results and financial condition of the Group.
In this consolidated fiscal year, the impact of exchange rate fluctuations on core operating income is estimated to be about a 2.5 billion-yen decline in annual income on the assumption of one yen appreciation against the US dollar.
With respect to the demand for financing, the Group determines the amount, term, and method of fund procurement, taking into consideration the demand for financing, financial position, and the financial environment. In preparation for interest rate fluctuations, the Group raises funds by combining both fixed interest rates and floating interest rates, as applicable. If interest rates rise, however, the increase in interest expenses may have an adverse effect on the operational results and financial condition of the Group.
(Fluctuation in stock market prices)
Since most of the securities held by the Group are marketable securities, if stock market prices sharply decline, there may be an adverse impact on the financial condition of the Group.
2) Overseas business expansion
The Group has production and sales facilities in countries around the world, and over 60% of its revenue is generated outside Japan. For this reason, if geopolitical issues occur, such as an increase in tariffs due to a trade conflict or a breakdown in supply chains due to regional conflicts, the business results and financial condition of the Group could be affected.
In addition, to conduct business activities in foreign countries, the Group needs to address the potential risks of changes in laws and restrictions, disputes stemming from differences in working conditions, difficulties in hiring and procuring human resources, social disorder caused by terrorism or war, and other factors. In the event that these risks surface, there is a possibility that such events might adversely affect the business results and financial condition of the Group.
Rabigh Refining and Petrochemical Company (below, Petro Rabigh), jointly founded by the Company and Saudi Aramco, is operating an integrated refinery and petrochemicals complex (the Rabigh Phase I Project and Rabigh Phase II Project) in Rabigh, Saudi Arabia. In case the Company is held liable for damages resulting from contingent circumstances, it has obtained overseas investment insurance covering the total investment in accordance with the rules and maximum insurance amount of Nippon Export and Investment Insurance, an incorporated administrative agency of the government of Japan. In addition, the Company entered into a completion guarantee for the project financing contract with respect to the Rabigh Phase II Project, but the completion guarantee was completed as of September 30, 2020.
However, Sumitomo Chemical is serving as guarantor for some of the other loans taken out by Petro Rabigh.
The performance of these guarantee obligations has the potential to impact Sumitomo Chemical’s operating results and financial condition.
3) Acquisitions and equity alliances
The Group is engaging in domestic and international acquisitions and equity alliances with the aim of expanding its business and enhancing its competitiveness. The Group, however, may not be able to generate the synergies or other positive effects initially expected due to changes in the business environment surrounding the Group or the acquired business. Impairment loss of goodwill may be recorded if the expected results are considered unattainable due to changes in business environment and competitive environment, and if an applicable discount rate is raised. This may affect the business performance and financial status of the Group.
4) Technology, Research and Development
The Group is vigorously carrying out research and development to rapidly commercialize new technologies and new products that will meet customer needs. The research and development (R&D) conducted by the Group may sometimes extend over a long period of time, particularly when it includes discovery research in order to create next-generation businesses. In the event that the subject of such research and development is not put to practical use, or if the development of new products is significantly delayed or abandoned, the competitiveness of the Group may be diminished, which may have an adverse effect on operational results and the financial condition of the Group.
The Group promotes R&D by the deployment and full use of AI and materials informatics on the R&D frontlines, and by the enhancement of collaboration (open innovation) with academia and startups.
(2)Medium- to long-term risks
1) Climate change issues
One of the important agendas of the Group is climate change issues facing the society. Using technologies cultivated as a general chemical company, the Group has been proactively working to rationalize production processes for its products, and to develop products that contribute to the reduction of greenhouse gas emissions. If these issues cannot be properly addressed, it may affect the business activities of the Group. We work towards the resolution of climate change issues that affect our daily living on a global scale from the aspects of both “addressing risks” and “seizing opportunities.”
2) Plastic waste problem
Plastics underpin our daily living as materials for various uses in automobiles, aircrafts, electronic devices, household goods, and various packaging materials. The current issue is that, because they are not treated or recycled properly and adequately after use, the create environmental pollution. If this issue is not properly addressed, it may affect the business activities of the Group.
The Sumitomo Chemical Group is potentially in a beneficial position with respect to the plastic market that may exist after the creation of a recycling-based society, due to its efforts to achieve plastic resource circulation through the development of technologies and other efforts.
2. Risks involved in the foundation of business continuity
1) Accidents and disasters
The Group conducts periodic inspections for all manufacturing facilities in order to minimize the potential risks of the shutdown of production facilities or accidents involving the production facilities which will adversely affect the Group.
However, there is no guarantee that such accidents arising out of production facilities or negative effects caused by natural disasters will be completely prevented or reduced.
In the event of an accident that causes property damage and/or human injury near the plant, it may undermine the Group’s business activities, incur major costs, and have a significant impact on market perceptions of the Group. This in turn may adversely affect the operational results and financial condition of the Group.
2) Quality of products
Although the Group manufactures a wide variety of products in accordance with globally recognized strict quality control standards, there is no assurance that all the products are free from defects or that no product recall problems will occur in the future. Large-scale product liability lawsuits could be extremely costly and have a significant impact on market perceptions of the Group, which, in turn, may adversely affect the operational results and financial condition of the Group.
Although our agricultural chemicals and pharmaceuticals that are on the market have been approved in accordance with strict quality examinations in each country, new quality problems or side effects may be identified as a result of progress in science and technology, as well as from accumulated clinical experience. If such unexpected quality problems or side effects are discovered after products have been marketed, there is a possibility that such circumstances may adversely affect the operational results and financial condition of the Group.
3) Information security
The company is accelerating its digital transformation, making use of IT to pursue improvements in productivity, secure competitive advantages in their businesses, and create new business models. At the same time, this increases the threat of the wide range of impacts that cyberattacks may have on information systems, which could adversely affect the Company’s business operations.
The Group properly manages information and takes measures to obviate its leakage and loss and to minimize the impact of security-related incidents. Setting information security as a management agenda, we continue to address increasing threats on information security.
4) Sudden changes to the business environment due to DX
The Sumitomo Chemical Group is actively making use of digital technologies, such as IoT, AI, MI, and RPA, in a range of fields, including plant operations, research and development, office tasks, and supply chain management, dramatically improving productivity for operational processes, ensuring competitiveness in existing businesses, and creating new business models. At the same time, however, if the Company’s application of digital technology is significantly delayed, if other companies utilize digital technology to improve their productivity or competitiveness, or if there is some other sudden change to the business environment, such as the creation of new business models, the relative competitive strength of the Group could decline, which could adversely affect the operational results and financial condition of the Group.
5) Compliance-related risks
The Group positions compliance as the root of business management, and builds/operates a group-wide compliance promotion system under the guidance and supervision of its Compliance Committee. Enhancing guidance and assistance to the Group from the regional legal compliance operation (RLCO) under the Compliance Committee, we focus on strict group-wide compliance. However, compliance-related risks may not be completely eliminated even after all possible measures are taken. In the event of compliance violations that breach domestic and foreign laws, it may undermine social credibility of the Group, and may result in monetary liabilities and penalties. This may affect the business performance and financial status of the Group.
6) Change in regulations
The Group conducts its businesses in accordance with the laws and regulations of each country in which it operates. Changes in laws, regulations, government policies, business customs, interpretations or other changes, and the resulting implications, may have adverse effects on the operational results and financial condition of the Group. Moreover, more legal regulations on environment and safety for chemicals may be imposed in the future, and this may incur additional costs to the Group.
7) Human rights issues
The Group regards respect for human rights as one of the foundations for business continuity. By enacting the “Sumitomo Chemical Group Basic Policy on Respect for Human Rights,” we set up the “Human Rights Promotion Committee” as a system to accelerate the process and work as one on initiatives to protect human rights, such as human rights due diligence. At the same time, however, even having established these policies, there is a possibility that the Group may not be able to completely eliminate risks resulting to human rights, and if a human rights issue were to occur further up the Group’s value chain, that may have an adverse effect on the business activities of the Group.
8) Intellectual property rights
The Group has been strengthening its competitiveness by developing and accumulating proprietary technologies and know-how that will differentiate itself from competitors.
Although such technology and know-how are under strict control by the Group, there is a possibility that some of the proprietary technologies, products, and know-how of the Group may be unexpectedly leaked to others. Furthermore, intellectual property may not be completely protected in particular geographical areas. In some areas, there is a possibility that the Group may be unable to effectively prevent a third party from manufacturing similar products that are covered by the Group’s intellectual property rights. Furthermore, the Group may become involved in intellectual property rights disputes, which might result in outcomes that run counter to the interests of the Group.
9) Pandemic spread
In the event of a global pandemic, it may affect the business performance and financial status of the Group. We set up a Risk Crisis Management Committee to address risks that may affect the entire Group, and deliberate on policies to address the situation.
The Group formulated a business continuity plan and made it a rule to continue to operate businesses, depending on the phase of pandemic status.
While the Covid-19 pandemic had an adverse effect on certain business fields, such as automotive related fields, primarily in the first half, that adverse impact had begun to gradually recede by the end of this consolidated fiscal year. In the next consolidated fiscal year and beyond, it is expected that the impact on the Group’s performance may be limited, but depending on the state of the pandemic going forward, it may have a significant adverse effect on the Group’s business performance or financial situation.
The Group continues to make its utmost efforts to fulfill its responsibilities to supply products to customers while securing the safety of its employees.
As the Group’s businesses develop in Japan and elsewhere in the world, they remain exposed to the risks of becoming the target of lawsuits, disputes, or other legal procedures. In the event any significant lawsuit is filed against the Group, this could adversely affect the operational results and financial condition of the Group.